Turning a tax nightmare into a dream


As you have probably heard, President Trump has stated that he plans to lower tax rates. Congress has been working on a number of changes to the tax code that would increase taxes – not tax rates – but taxes, nevertheless. They are just waiting for the right bill to append these in order to get them signed into law. Let’s look at one proposed change that could significantly affect estate planning.

 Under current tax rules, when the owner of an IRA (traditional or Roth) dies, the account either passes to the owner’s spouse or to non-spousal beneficiaries. If the IRA passes to a spouse, there is no immediate tax impact. If the IRA passes to a non-spouse, however, then there may be a tax impact (Roth IRAs pass income tax free).

When a non-spouse inherits an IRA, either traditional or Roth, they must elect either to withdraw all of the money from the IRA within five years or choose to receive annual payments, based on the required minimum distribution tables, over their lifetime. Obviously, the latter selection – lifetime payments – creates the opportunity for a much larger payout over time and the possibility of much lower taxes (assuming a traditional IRA), as the amount received in any one year could be based on the life expectancy of the heir.

 The option of lifetime payments is what Congress is considering eliminating, potentially for both traditional and Roth IRAs. Their argument is that this type of extended payout creates an economic benefit for non-spousal beneficiaries, which was not contemplated or intended by the law that created IRAs. So, they want to limit the distribution options to the five-year option only. Will this affect estate plans for many? You bet! I know many people who have protected their IRA accounts in order to give them to their children and/or grandchildren with the specific lifetime payment option in mind. If Congress repeals this option, many plans could be dashed.

 All is not lost, however. Since life insurance proceeds pass to beneficiaries – any beneficiary – without any income tax liability, one could buy a life insurance policy by taking regular withdrawals from their IRA account and leave the life policy value income tax-free to the heir(s) in whatever manner and with whatever restrictions they wish. And, it is probable that the face value of the life insurance will be well beyond the premiums paid for many years into the future and worth more than the IRA…therefore the gift is highly enhanced by being in a life insurance policy.

Finally, the value of a whole life or fixed-index life insurance policy generally only rises in value, whereas an IRA account invested in the market can both rise and fall, so using life insurance enhances the predictability of the gift.

 Frederic “Ric” Schilling is a Florida native, born in Jacksonville, Fl. Ric is President of Senior Guardians of America, a local North Florida firm specializing in tax reduction, long term illness planning, asset protection, probate avoidance and life income planning. Ric is a National Speaker and Advocate on Senior Issues and has been featured by the Florida Times Union and WJXT, TV-4 in Jacksonville as an authority on Estate Planning and Retirement Issues. Senior Guardians has an A+ rating with the Better Business Bureau and is a member in excellent standing with the National Ethics Association. Contact Frederic: 904-371-3302 or 888-891-3381 Please visit: www.seniorguardian.comThis article is not intended to give tax or legal advice. Securities offered through Center Street Securities, Inc. (CSS), a registered Broker-Dealer and Member of FINRA & SIPC. Senior Guardians is independent of CSS.